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Financial services digital tax considerations

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Digital has changed financial services, perhaps more than any other sector. Today financial services look completely different to how they were just five years ago, with many new players now active that are worlds away from the traditional companies that have so long defined the industry.

One of the key factors behind this digital revolution is common across the whole industry: data. When we asked 30 industry leaders to predict what the financial services sector might look like in 2030, one of the clearest messages was that data is fast becoming the most valuable currency of all.

This move towards a focus on data and the erosion of the line between financial services and technology companies is increasingly reflected in the way the sector is regulated. Regulatory trends suggest a move away from enterprise-based regulation to a focus on activities – it is less who you are now, but rather what you do.

What does this mean for tax? Tax has historically stood apart from other financial services regulation. Within a business, it has perhaps been the poor relation when it comes to claiming internal budget and resources, with significantly bigger budgets being allocated to compliance with regulatory initiatives such as Solvency II, Basel III and MiFID II.

However tax is now catching up. With increasing press and public scrutiny and the potential for damaging hits to the P&L, the C-Suite is starting to see this as fundamentally similar to other areas of regulation and so deserving of similar resources and focus.

And not a moment too soon. Digital is accelerating the pace of change in regulation. The rules are evolving ever more quickly to keep up with the innovations which are constantly driving new developments within the industry and leveraging on-going improvements in technology which should in principle allow regulators to do more with their available resources.

At the same time, certain key themes have emerged on the global tax agenda over the past few years, increasing the appetite for data. To combat errors and avoidance, there is the international move towards real-time reporting and online or secure digital tax filing. Governments are becoming more reliant on financial services providers to gather the right data on individuals and to collect or deduct applicable tax amounts. The EU Mandatory Disclosure Rules are a tax-focused, EU-wide disclosure requirement designed to increase transparency across the member states. The rules are designed to capture aggressive tax planning arrangements and create a significant tracking and reporting burden for financial services companies.

Governments are shifting closer towards near real-time tax reporting and payment to support their fight against tax avoidance. Poland has already effectively announced the death of their VAT returns – to be replaced with regular standard audit files (SAF-T) – and others look set to follow [1][2].

Financial services providers also have to consider the growing popularity of information exchange regimes between governments. This is already happening in the tax world, with the OECD driving the automatic exchange of information across tax authorities of different nations. But there is furthermore the potential for different regulators to compare the information between themselves and with tax authorities. Will financial sector participants always be able to ensure the numbers they put together for tax authorities reconcile fully with the detailed information provided to the financial regulators?

As the future of financial services seems to be interconnected, collaborative and frictionless, companies will need to anticipate, be agile and adapt quickly to changing circumstances.

This will be a crucial differentiating factor in preparing for the digital tax regime of the future. We believe that the policy trends will likely be for more sales-focused taxes, more real-time customer tax reporting and more withholding taxes. We also think there will be less bespoke sector-specific tax legislation, something else that is already starting to happen. The EU is considering removing VAT exemptions for financial services to reflect the changing face of the sector. As companies begin to have only a digital presence in some jurisdictions, the shift from taxing enterprises to taxing activities will also, we believe, take a more defined shape, with taxation no longer concentrating on the place of residence but instead focusing on the place of consumption. The UK’s recently announced 2% digital services tax is a clear example of this.

The larger financial services providers will likely have to engage in significant projects to effect the transformational change needed to meet the challenges of this new dynamic environment. These projects will have to be managed effectively and the in-house tax and finance teams need to be well placed to move with the changes that are required. Financial services businesses, therefore, need to consider whether they are ready for the changes, particularly the increasingly onerous reporting requirements. Rather than seeking to automate complex and inefficient processes, they need to consider implementing a broader financial transformation strategy; a strategy that can evolve with rapidly changing circumstances while encompassing the full end-to-end processes within the organisation and seeking to touch data fewer times to cut costs and maximise value.

One thing is certain: the future is likely to bring significant moves towards much more efficient systems and processes that, if implemented correctly, offer the potential for substantial benefits for financial services companies and for tax authorities. Although disruption is inevitable, and some professionals may struggle to cope well with this on a personal level, the ultimate consequence for the majority should be that tax teams will be able to focus on being tax advisers again empowered by technology. In turn, reporting requirements will be met in a much less labour-intensive and more accurate way.

The tax adviser of the foreseeable future will not be a robot, but will need to be comfortable using robotics, artificial intelligence and other new technologies to manage the increasing demand from tax authorities and businesses for data.

KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.